MercoPress. South Atlantic News Agency

“Vulnerable to funding stress” Moody’s downgrades Spain’s sovereign rating

This was the third downgrade from the big-three rating agencies in the past few weeks (Photo EFE)

Moody's Investors Service cut Spain's sovereign ratings by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stress.

Worsening growth prospects for the Euro zone will also make it more challenging for Spain to reach its ambitious fiscal targets, the ratings agency added on Tuesday.

Spain could be downgraded again if the Euro zone debt crisis escalates further, Moody's warned.

“Since placing Spain's ratings under review in late July, no credible resolution of the current sovereign debt crisis has emerged, and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored,” Moody's said in a report.

The downgrade puts more pressure on Euro-zone leaders, who will meet this weekend to discuss a solution for the crisis. Moody's downgrade on Spain was the third received from the big-three ratings agencies in the past few weeks. Moody's was more aggressive than its rivals, however, cutting the country's ratings to A1 from Aa2.

Standard & Poor's and Fitch Ratings both have Spain one notch higher.

Market analysts said the news, although not unexpected, highlighted the seriousness of the European debt crisis.

In related news Standard & Poor's downgraded 24 Italian banks and financial institutions, citing renewed “market tensions” and lower economic growth prospects.

The action was taken after a review of the implications of a tougher-than-previously-anticipated macroeconomic and financial environment for the Italian banks, the credit rating agency said.

“In our opinion, renewed market tensions in the euro zone's periphery, particularly in Italy, and dimming growth prospects have led to further deterioration in the operating environment for Italian banks,” it said in a statement.